Do you pay any of your employees a daily rate? Do you think you’re saving money on overtime by paying a daily rate? If so, you’ve opened yourself up to liability for overtime lawsuits. 
Day-rate employees are paid on a per-day basis as opposed to being paid a salary or an hourly rate. Although day-rate employees are paid a flat rate for the entire day, you must still pay them overtime if they work more than 40 hours per week. If you don’t pay your day-rate employees overtime, you need to rectify the situation immediately.
Recent case
On May 3, 2016, a Houston-area foundation repair company, Allied, agreed to pay $682,318 in back wages to 161 employees for overtime violations. Allied was paying the employees on a day-rate basis, but it wasn’t paying them overtime when they worked more than 40 hours a week. The employees were working an average of 45 or 53 hours each week, depending on whether they worked five or six days a week.
Moreover, Allied was keeping records only of how many days employees worked each week. It’s important to keep records of the number of hours each employee works and pay your nonexempt, nonsalaried employees overtime.
Allied isn’t alone. The U.S. Department of Labor (DOL) has been targeting oil and gas companies as well as construction companies to recover lost wages for unpaid overtime. In 2015, the DOL recovered more than $460,000 for construction workers in Texas, and five Texas oil and gas companies have paid more than $3 million in back overtime to day-rate employees.
How to calculate overtime for day-rate employees
Calculating overtime for day-rate employees isn’t the same as calculating overtime pay for hourly employees. Calculating overtime for an hourly employee is much more basic. If you have day-rate employees, it’s important to know the three steps for calculating their overtime pay:
- Multiply the amount the employee is paid for a day’s work by the number of days he worked that week.
- Divide the number in step one by the number of hours the employee worked that week to get his “regular rate.”
- Divide the regular rate by two to get the hourly rate you must pay the employee for each hour he works over 40 in a week.
Here’s an example: John is paid $200 a day on a day-rate basis. He works five days a week. In week one, he worked 45 hours, and in week two, he worked 50 hours. The overtime calculation for the first week would be:
- $200 x 5 = $1,000
- $1,000 ÷ 45 = $22.22 (the regular rate)
- $22.22 ÷ 2 = $11.11 (the overtime rate)
- $11.11 x 5 = $55.55
- $1,000 + $55.55 = $1,055.55
For week two, the calculation would be:
- $200 x 5 = $1,000
- $1,000 ÷ 50 = $20 (the regular rate)
- $20 ÷ 2 = $10 (the overtime rate)
- $10 x 10 = $100
- $1,000 + $100 = $1,100
The overtime calculation can be a bit confusing because the employee’s “regular rate” will change depending on the hours he worked each week. The more hours a day-rate employee works each week, the lower his regular rate will be. Consequently, he will earn less overtime pay.
Bottom line
Make sure you classify employees correctly, and don’t pay someone a daily rate if you should be paying him a salary or an hourly rate. A day-rate employee’s daily rate cannot fluctuate based on the hours he works each day, and he must not receive any other form of compensation from your company. If he does, you should reclassify him as an hourly worker.
To avoid any potential liability, make sure your day-rate employees are working no more than 40 hours per week or you are paying them overtime if they do. The DOL is cracking down on companies that don’t pay their day-rate employees overtime. You certainly don’t want to find yourself in the middle of a class action lawsuit.
It’s still beneficial to employ day-rate workers because you can save money on overtime. As the number of hours a day-rate employee works each week increases, his overtime rate decreases. An hourly employee’s overtime rate remains constant no matter how many hours he works each week.
Classifying employees can be tricky. Contact an experienced labor and employment lawyer to make sure you’re complying with federal wage and hour law and the DOL’s requirements. Waiting until you’re facing a lawsuit before you spend the time and money to properly classify your employees could cost you tenfold.
Jacob M. Monty of Monty & Ramirez LLP, practices at the intersection of immigration and labor law. He is the managing partner of the Houston firm and may be contacted at jmonty@montyramirezlaw.com.